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Researching the financial health of your life insurance
company is just as important as researching prices and coverage options
when you are shopping for an insurance policy. Financial strength
ratings are especially important for life insurance because you want to
be assured that your life insurance company will be around 10, 20, or
30 years from now — or whenever you pass away and your beneficiaries go
to claim the insurance money.
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Insure.com offers ratings
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Insure.com offers instant quotes from up to 35 leading life insurance companies
and includes the latest financial stability ratings from A.M. Best,
Fitch, Moody's, Standard & Poor's and TheStreet.com on every life
insurance illustration.
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Yet financial strength ratings are probably the
most-ignored component of the life insurance buying process. A number
of companies provide ratings for the financial strength, also called
claims-paying ability, of insurance companies. Jack Dolan, spokesperson
for the American Council of Life Insurers, says, "Consumers want to
know that their insurance company will be around when benefits are
needed and that could be decades away. So you want a company that is
financially strong."
Each ratings provider uses a different system for
"grading" insurers, so one ratings company's A is not the same as
another's A. However, you can still determine if your insurer has a
strong rating. In addition, Dolan recommends that you ask your state
insurance department or insurance agent about the financial strength of
the company from which you plan to buy life insurance.
We asked each major ratings company how it goes about its business.
A.M. Best specializes exclusively on rating the
insurance marketplace. The company considers an insurance company's
balance sheet strength, operating performance and business profile to
determine each company’s rating.
Insurance companies that want to be rated contact
A.M. Best and pay a fee to be rated, which covers primarily
administrative costs. Andrew Edelsberg, vice president in A.M. Best's
life/health ratings division, says that the fee does not influence A.M.
Best's rating of an insurer: "I’m an analyst, so it doesn’t matter to
me if a company pays $1 or a $1 million to be rated," he says.
Edelsberg explains, "We form an opinion built
on careful analysis of a company's financial information. We also
interact with management to best understand all the risks of its
business."
"To gain insight into the company’s future, we
listen to calls, meet with management, and follow the news of the day
on a regular basis to determine what that might mean to the companies
we rate," says Edelsberg. A.M. Best updates ratings at least every 12
to 36 months, or as events occur that could influence a company's
finances. Edelsberg notes that not every event requires a ratings
change. For example, a small lawsuit against a company and a fine by
the National Association of Insurance Commissioners may not be
significant enough to merit a ratings review.
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When you're buying a life insurance policy, Edelsberg suggests that you
first consider companies that have a secure rating such as A+ from A.M.
Best. |
Not every insurer ends up happy with its rating.
"No one wants a bad review," he says. "Our rating is an opinion based
on over one hundred years of analyzing companies. Some companies feel
that their ratings should be higher, but keep in mind we are objective
when we approach this because it’s an opinion. The best way to prove us
wrong is to make improvements where needed to perform better the next
time. We would tell them this: 'We think this is risky, so if you
reduce your exposure this should help your rating.'"
You can search A.M. Best's ratings on its site and also purchase insurer reports that show company history and market share.
When you're buying a life insurance policy,
Edelsberg suggests that you first consider companies that have a secure
rating such as A+.
Fitch Ratings uses these criteria for determining a
life insurance company’s financial strength rating: How well a company
is organized and operated, the strength of its management team, its
strategies, its corporate decision-making process and the degree of the
risk in its market. For example, a property/casualty insurance company
tends to take on more risk than a life insurer.
Fitch conducts a financial review that includes
examining the insurer’s statutory financial statements that are filed
with state regulators. Where available, Fitch also reviews the
company’s unaudited financial statements, management reports and
company projections. Fitch updates its ratings at least once a year.
Its ratings range from AAA (highest) to D (default).
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A Fitch rating of BB+ or higher is considered "investment grade."
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Sandro Scenga, spokesperson for Fitch Ratings, says
that his company does not make recommendations about insurers based on
ratings but that a rating of BB+ or higher is considered "investment
grade."
Fitch charges insurers for conducting ratings evaluations, which are freely available on the Fitch Ratings Web site.
Moody's Investors Service uses these key factors in determining an insurer's rating:
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Lack of company liquidity affects insurance policies
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problem in the credit market is a lack of liquidity, says Levine. For
the consumer, this can be devastating. A lack of liquidity can result
in a company’s inability to meet the demands of its liabilities. As a
result, financial troubles, real or perceived, can compel policyholders
to surrender their policies or withdraw their money from banking
accounts.
An example in the banking industry is the collapse of Washington Mutual
bank, which became insolvent and was seized by the government.
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Business profile
- Market position
- Brand distribution
- Product focus
- Diversification
Financial profile
- Asset quality
- Capital adequacy
- Profitability and ALM
- Financial flexibility
To determine a company’s financial strength,
Moody’s looks at the amount of assets a company owns, its performance
history and the quality of its investments. They also consider the
ability of a company to pay its debts.
"All of these factors helps us determine how much
cushion the company has to absorb unexpected losses," says Joel Levine,
senior vice president and team leader for the credit monitoring
division at Moody’s Investors Service. Moody’s has assigned its
Insurance Financial Strength (IFS) ratings to 238 life insurance
companies.
"The average IFS rating is A1, and only 15 percent
of the total IFS ratings are rated below A," Levine says. "Fewer than 6
percent of the insurers we rate are below Baa."
Levine notes that if he were to purchase a life
insurance policy he would want an investment grade issuer with an A1
rating or better.
Moody’s reevaluates its ratings as often as needed.
Levine says, "We don’t operate on a calendar schedule. If we are
working with a company in stress, we have many ongoing conversations
with them as we monitor the situation. In a crisis situation, we would
be following up with the company on a daily or weekly basis."
Moody’s reports are only available to those they
rate and by subscription, but you can call Moody’s Ratings Desk in New
York at (212) 553-0377 to request the rating of any company.
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Can an insurance company withdraw its S&P rating?
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Once an insurance company’s rating makes the public record, it cannot withdraw the rating.
"They cannot erase history," says Bob Swanton, Standard & Poor’s ratings analyst.
However, if an insurance company is evaluated for the first time and
its rating is not good, it can choose not to accept the rating, he
says. That means that there will be no public record that the company
ever underwent a ratings analysis.
An insurance company may also choose to discontinue its annual ratings
analysis. That often happens when insurance companies are facing
financial difficulty and expect their ratings will drop. However,
Standard & Poor’s will still reassess the company’s rating on its
own, which prevents the insurance company from keeping a high rank if
it slips into difficulty.
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Standard & Poor’s ratings analysts examine a
variety of insurer financial statements along with an in-depth look at
the insurer’s management team, company strategies and ability to manage
its risk. In addition, S&P evaluates the diversity of the products
sold and the company’s financial history, economic environment and
competitive position. S&P updates its ratings once a year in a full
annual review but also hosts quarterly discussions with the company. It
charges insurers for conducting its ratings evaluations.
S&P uses a ratings system from AAA (highest
rating) to D (default), with plus and minus signs within each ratings
category, with the exception of the highest and lowest grades.
S&P ratings can be found through Insure.com's Insurance Company Ratings Lookup tool.
The Street.com Ratings (formerly Weiss Ratings)
uses five criteria for determining a life insurance company’s financial
strength rating: capitalization, profitability, investment quality,
liquidity and operational stability.
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Any insurance company that is rated B+ or higher by TheStreet.com is recommended. |
"Capitalization is weighed the heaviest, but they
are all significant," says Melissa Gannon, vice president of insurance
and bank ratings. Considered within those five categories are the
degree of risk in the company’s business profile and the types of
investments it makes. The largest single factor that affects an
insurance company’s rating is the status of its statutory financial
statements (which the insurance company must file with state
regulators), Gannon says.
In addition, TheStreet.com Ratings asks the insurer
to take a survey and demands to see certain confidential information
such as the company’s asset liability matching studies, guarantees of
solvency and internal documents that aren't public.
The Street.com Ratings updates its ratings
quarterly. Its ratings fall on a scale of A to F and each letter can
carry a plus or minus (the highest rating is an A+). Any insurance
company that is rated B+ or higher is recommended, Gannon says. The
Street.com Ratings is unusual in that it does not charge an insurance
company for being rated. Its revenue comes from the sale of ratings,
reports, books and other consumer information products.
TheStreet.com's Ratings Screener allows you to look up ratings for free.
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